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Hi
There is a massive increase in other operating questions here which is only partly due to the provision. I am wondering what sort of trading situation would explain such an increase? The examiners answer doesn’t seem to explain it.There will not necessarily be an explanation for everything. Exam question scenarios are necessarily contrived and simplified to provide a “vehicle” for whatever it is the examiner wants to ask. The Q here is very much focused on going concern – rather than ROMM and substantive audit procedures. The examiner may have deliberately not pointed to a reason for the increase to avoid unnecessary digression. As you observe it does seem unlikely.
Thanks once again. Its very difficult to assess the co’s going concern issues if its not possible to assess whether its profitability issues can be addressed. Because there’s no clue as to the cause. The working capital management issues may be fixable. Seems an unfair question. Maybe I’m overthinking it!
You seem to be over-thinking it from management’s perspective – as auditor you don’t have to “solve” the profitability issue. Also note that the net loss (3.4) is attributable to the legal action (3.5) – so although there is an unexplained increase in operating expenses you don’t need to get to the bottom of it to answer the question.
But in order to assess whether the co’s going concern disclosures are adequate don’t you as auditor have to come to an opinion as to the probability of the co returning to profitability or not?
Thanks.Short answer – NO.
Management discloses why there is uncertainty (IAS 1):
– finances are under negotiation (we don’t know the outcome)
– there is major pending litigation (we don’t know the outcome)
….Under ISAs the auditor considers the adequacy of the disclosure and report (adequate – “MURGC” – inadequate “qualified opinion”).
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